Are the historically low interest rates a thing of the past? What might an increase in rates do to buyers’ purchasing power in today’s market? These are questions we should be analyzing and answering for our clients as we continue to see upward pressure on rates.
Over the last few months we have watched as interest rates continued to rise. Moving from last year’s historic lows, where 30-year fixed rate mortgages hovered just under 4.5%, we have certainly seen a change in the tide. And while it’s important to point out that rates continue to remain at historic lows, it’s also just as important to make our clients aware that as rates rise, this will certainly affect their purchasing power when it comes time to buy their new home.
According to CNNMoney.com’s February 10, 2011 article, “Mortgage rates break 5%,” “The national average interest for a 30-year, fixed-rate mortgage surpassed 5% for the first time since May 2010, according to Freddie Mac’s Primary Mortgage Market Survey.”
We recently reached out to our friends at Princeton Capital to help us paint a picture as to how rises in interest rate—even seemingly small ones—can affect an individual’s purchasing power. What they found was that if the rates were at 4.5% on a $400,000 loan, the monthly payment (including principal, interest, taxes and insurance) was $2,641 and the individual’s annual income requirement needed to be at least $70,424. However, if rates rose 1.5% to 6%, the monthly payment jumped 12% to $3,012 and the annual income requirement also rose 12% to $80,330.
“We’ve seen the best,” said Brendon Riordan of Princeton Capital. “Rates bottomed out in 2010 and we watched them rise pretty significantly in December and January. We don’t anticipate them to go down, and by year’s end we may even see them hit the 6% mark.”